In case of alleged securities fraud, U.S. Supreme Court
holds that Section 10(b) does not provide a cause of action to foreign
plaintiffs; when a statute gives no clear indication of extraterritorial
application, it has none
The issue in the following case is whether Section 10(b) of
the Securities and Exchange Act of 1934 provides a cause of action to foreign
plaintiffs suing foreign and U.S. defendants for alleged misconduct in
connection with securities traded abroad.
Respondent National Australia Bank Ltd. (“National”) was the
largest bank in Australia. Its shares, however, were not traded in the U.S. One
could only buy National’s American Depositary Receipts (ADRs) through the New
York Stock Exchange. ADRs represent the right to receive a certain number of
ordinary shares. In 1998, National bought Respondent HomeSide Lending, Inc.
(HomeSide), a Florida mortgage servicing company. The value of HomeSide was
written down in 2001 by more than $2 billion. National’s shares and ADRs
dropped.
The Petitioners in this case are Australian citizens who
purchased National’s shares shortly before the write‑down. They sued National,
HomeSide, and several of their executives in the U.S. District Court for the
Southern District of New York for securities violations. According to the
Complaint filed in this case, HomeSide and some of its executives had
manipulated financial models to make HomeSide appear more valuable. National
was allegedly aware of the manipulation.
The District Court granted the Respondent’s motion to
dismiss for lack of subject‑matter jurisdiction under Fed.R.Civ.P. 12(b)(1) and
for failure to state a claim under Rule 12(b)(6). The District Court noted that
the alleged acts that occurred in the U.S. were only a link in the chain of an
alleged securities fraud that occurred abroad. The U.S. Court of Appeals
affirmed because the alleged acts that occurred in the U.S. did not comprise
the heart of the alleged fraud.
The U.S. Supreme Court granted certiorari. Justice Scalia
delivered the opinion of the Court.
The Supreme Court first explains that the Second Circuit
erroneously considered the extraterritorial reach of Section 10(b) as a matter
of subject‑matter jurisdiction. Other Circuits have taken the same view.
“ ...[T]o ask what conduct §10(b) reaches is to ask what
conduct §10(b) prohibits, which is a merits question. Subject‑matter
jurisdiction, by contrast, ‘refers to a tribunal’s ‘’power to hear a case.’’’
... It presents an issue quite separate from the question whether the
allegations the plaintiff makes entitle him to relief. ... The District Court
here had jurisdiction under 15 U.S.C. §78aa [district court’s exclusive
jurisdiction of Exchange Act violations] to adjudicate the question whether
§10(b) applies to National’s conduct.”
“In view of this error, which the parties do not dispute,
petitioners ask us to remand. We think that unnecessary. Since nothing in the
analysis of the courts below turned on the mistake, a remand would only require
a new Rule 12(b)(6) label for the same Rule 12(b)(1) conclusion.” [Slip Op. 4‑5]
The Supreme Court then turns to the extraterritorial reach
of Section 10(b). In general, a statute has no extraterritorial reach unless it
clearly states so. It appears that the Second Circuit has mistakenly led the
way to having courts interpret extraterritoriality into securities laws.
“It is a ‘longstanding principle of American law ‘that
legislation of Congress, unless a contrary intent appears, is meant to apply
only within the territorial jurisdiction of the United States.’’ EEOC v.
Arabian American Oil Co., 499 U.S. 244, 248 (1991) (Aramco) ... This principle
represents a canon of construction, or a presumption about a statute’s meaning,
rather than a limit upon Congress’s power to legislate ... It rests on the
perception that Congress ordinarily legislates with respect to domestic, not
foreign matters. ... Thus, ‘unless there is the affirmative intention of the
Congress clearly expressed’ to give a statute extraterritorial effect, ‘we must
presume it is primarily concerned with domestic conditions.’ Aramco, supra, at
248 ... The canon or presumption applies regardless of whether there is a risk
of conflict between the American statute and a foreign law ... When a statute
gives no clear indication of an extraterritorial application, it has none.”
“Despite this principle of interpretation, long and often
recited in our opinions, the Second Circuit believed that, because the Exchange
Act is silent as to the extraterritorial application of §10(b), it was left to
the court to ‘discern’ whether Congress would have wanted the statute to apply.
... This disregard of the presumption against extraterritoriality did not
originate with the Court of Appeals panel in this case. It has been repeated
over many decades by various courts of appeals in determining the application
of the Exchange Act, and §10(b) in particular, to fraudulent schemes that
involve conduct and effects abroad. That has produced a collection of tests for
divining what Congress would have wanted, complex in formulation and
unpredictable in application.” [...]
“... [T]he Second Circuit had excised the presumption
against extraterritoriality from the jurisprudence of §10(b) and replaced it
with the inquiry whether it would be reasonable (and hence what Congress would
have wanted) to apply the statute to a given situation. As long as there was
prescriptive jurisdiction to regulate, the Second Circuit explained, whether to
apply §10(b) even to ‘predominantly foreign’ transactions became a matter of
whether a court thought Congress ‘wished the precious resources of United
States courts and law enforcement agencies to be devoted to them rather than
leave the problem to foreign countries.’ ...”
“The Second Circuit had thus established that application of
§10(b) could be premised upon either some effect on American securities markets
or investors ... or significant conduct in the United States ... It later
formalized these two applications into (1) an ‘effects test,’ ‘whether the
wrongful conduct had a substantial effect in the United States or upon United
States citizens,’ and (2) a ‘conduct test,’ ‘whether the wrongful conduct occurred
in the United States.’ SEC v. Berger, 322 F. 3d 187, 192‑193 (CA2 2003). These
became the north star of the Second Circuit’s §10(b) jurisprudence, pointing
the way to what Congress would have wished. ... The Second Circuit never put
forward a textual or even extratextual basis for these tests. ...” [...]
“Other Circuits embraced the Second Circuit’s approach,
though not its precise application. Like the Second Circuit, they described
their decisions regarding the extraterritorial application of §10(b) as
essentially resolving matters of policy. ... While applying the same
fundamental methodology of balancing interests and arriving at what seemed the
best policy, they produced a proliferation of vaguely related variations on the
‘conduct’ and ‘effects’ tests. ...” [...]
“... The results of judicial‑speculation‑made‑law divining
what Congress would have wanted if it had thought of the situation before the
court demonstrate the wisdom of the presumption against extraterritoriality.
Rather than guess anew in each case, we apply the presumption in all cases,
preserving a stable background against which Congress can legislate with
predictable effects.” [Slip Op. 5‑12]
The Supreme Court then specifically focuses on Section
10(b), and concludes that it does not apply extraterritorially.
“Rule 10b‑5, the regulation under which petitioners have
brought suit, ... was promulgated under §10(b), and ‘does not extend beyond
conduct encompassed by §10(b)’s prohibition.’ ... Therefore, if §10(b) is not
extraterritorial, neither is Rule 10b‑5.”
“On its face, §10(b) contains nothing to suggest it applies
abroad: ‘It shall be unlawful for any person, directly or indirectly, by the
use of any means or instrumentality of interstate commerce or of the mails, or
of any facility of any national securities exchange... [t]o use or employ, in
connection with the purchase or sale of any security registered on a national
securities exchange or any security not so registered,... any manipulative or
deceptive device or contrivance in contravention of such rules and regulations
as the [Securities and Exchange] Commission may prescribe....’ 15 U.S.C.
78j(b).”
“Petitioners and the Solicitor General contend, however,
that three things indicate that §10(b) or the Exchange Act in general has at
least some extraterritorial application.”
“First, they point to the definition of ‘interstate
commerce,’ a term used in §10(b), which includes ‘trade, commerce,
transportation, or communication... between any foreign country and any State.’
15 U.S.C. §78c(a)(17). But ‘we have repeatedly held that even statutes that
contain broad language in their definitions of ‘commerce’ that expressly refer
to ‘foreign commerce’ do not apply abroad.’ Aramco, 499 U.S., at 251 ... The
general reference to foreign commerce in the definition of ‘interstate
commerce’ does not defeat the presumption against extraterritoriality ...”
“Petitioners and the Solicitor General next point out that
Congress, in describing the purposes of the Exchange Act, observed that the
‘prices established and offered in such transactions are generally disseminated
and quoted throughout the United States and foreign countries.’ 15 U.S.C.
§78b(2). The antecedent of ‘such transactions,’ however, is found in the first
sentence of the section, which declares that ‘transactions in securities as
commonly conducted upon securities exchanges and over‑the‑counter markets are
affected with a national public interest.’ §78b. Nothing suggests that this
national public interest pertains to transactions conducted upon foreign
exchanges and markets. The fleeting reference to the dissemination and
quotation abroad of the prices of securities traded in domestic exchanges and
markets cannot overcome the presumption against extraterritoriality. Finally, there
is §30(b) of the Exchange Act, 15 U.S.C. §78dd(b), which does mention the Act’s
extraterritorial application: ‘The provisions of [the Exchange Act] or of any
rule or regulation thereunder shall not apply to any person insofar as he
transacts a business in securities without the jurisdiction of the United
States,’ unless he does so in violation of regulations promulgated by the
Securities and Exchange Commission ‘to prevent... evasion of [the Act].’ (The
parties have pointed us to no regulation promulgated pursuant to §30(b).) The
Solicitor General argues that ‘[this] exemption would have no function if the
Act did not apply in the first instance to securities transactions that occur
abroad.’ ...”
“We are not convinced. In the first place, it would be odd
for Congress to indicate the extraterritorial application of the whole Exchange
Act by means of a provision imposing a condition precedent to its application
abroad. And if the whole Act applied abroad, why would the Commission’s
enabling regulations be limited to those preventing ‘evasion’ of the Act,
rather than all those preventing ‘violation’? The provision seems to us
directed at actions abroad that might conceal a domestic violation, or might
cause what would otherwise be a domestic violation to escape on a technicality.
At most, the Solicitor General’s proposed inference is possible; but possible
interpretations of statutory language do not override the presumption against
extraterritoriality. See Aramco, supra, at 253.”
“Subsection 30(a) contains what §10(b) lacks: a clear
statement of extraterritorial effect. Its explicit provision for a specific
extraterritorial application would be quite superfluous if the rest of the
Exchange Act already applied to transactions on foreign exchanges and its limitation
of that application to securities of domestic issuers would be inoperative.
Even if that were not true, when a statute provides for some extraterritorial
application, the presumption against extraterritoriality operates to limit that
provision to its terms. ... No one claims that §30(a) applies here.” [...]
“In short, there is no affirmative indication in the
Exchange Act that §10(b) applies extraterritorially, and we therefore conclude
that it does not.” [Slip Op. 12‑16]
The focus of the Exchange Act is upon the purchases and
sales of securities in the U.S., not upon the place where the deception
originated. Section 10(b) punishes only deceptive conduct “in connection with
the purchase or sale of any security registered on a national securities exchange
or any security not so registered.” 15 U.S.C. Section 78j(b).
“Section 10(b) reaches the use of a manipulative or
deceptive device or contrivance only in connection with the purchase or sale of
a security listed on an American stock exchange, and the purchase or sale of
any other security in the United States. This case involves no securities
listed on a domestic exchange, and all aspects of the purchases complained of
by those petitioners who still have live claims occurred outside the United
States. Petitioners have therefore failed to state a claim on which relief can
be granted. We affirm the dismissal of petitioners’ complaint on this ground.”
[Slip Op. 24]
Justice Stevens, joined by Justice Ginsburg, concurs in the
judgment. The Petitioners have failed to state a claim upon which relief can be
granted. This conclusion, however, does not warrant a reversal of the Second
Circuit (and most of the U.S.’s) law for the past 40 years. The new
“transactional test” announced by the Supreme Court applies Section 10(b) only
to transactions in securities listed on domestic exchanges and domestic
transactions in other securities. This novel approach will prevent private
parties from bringing Section 10(b) actions whenever the relevant securities
were sold or purchased abroad and are not listed on a domestic exchange.
Citation: Morrison v. National Australia Bank Ltd.,
No. 08‑1191 (U.S. Supreme Court June 24, 2010).
**** Mr. Richard Ehrlich is a specialist in Corporate, Estate and Personal Financial Planning in Florida. In the course of his career, he has prepared hundreds of estate plans and helped hundreds of small businesses navigate the various issues involving insurance, retirement and employee retention. He has helped numerous families deal with the difficulties of taking care of elderly relatives and assisted with all of their long-term planning and long-term care needs. Finally, he has helped investors with their losses in unsuitable investments. LinkedIn Profile: https://www.linkedin.com/in/richard-ehrlich-777b513/; Attorney Profile: http://www.eldercounsel.com/profile/richard-ehrlich-ehrlich-law-center-pa/; Attorney Profile: https://solomonlawguild.com/richard-ehrlich%2C-esq; Attorney News: https://attorneygazette.com/richard-ehrlich%2C-esq#c35a1098-f039-43ab-b0dc-06cff6dabf61
